Missing Pieces? Understanding the New Jersey Property Tax Puzzle

September 11, 2018

***Jersey First is sharing this important paper written by Fair Property Taxes for All New Jersey because we share the common goal of wanting to reduce the tax burden on New Jerseyans so that our friends and families stay in New Jersey. Fair Property Taxes for All New Jersey seeks to educate New Jersey residents on the state’s property tax system and explores possible solutions to making the state more affordable.***

Missing Pieces? Understanding the New Jersey Property Tax Puzzle

Author, Source, and Expert – Fair Property Taxes for All New Jersey

Nothing stirs anxiety in New Jersey homeowners more than the arrival of their annual property tax bill. Homeowners in the Garden State pay the highest property tax rates in the country. The average New Jersey residential property tax bill is $8,690 while the national average is $3,296. Democratic and Republican lawmakers in New Jersey have both pledged to reduce residential property taxes, but little relief has occurred.

Why are the New Jersey property taxes the highest in the nation? What conditions in the state contribute to decisions to raise property taxes? Is there hope for changing the system or has New Jersey reached the point of no return?

How does the New Jersey residential property tax system work? The New Jersey system of local property assessment and taxation originated in 1670 when a tax of one-half penny per acre was imposed for the purpose of establishing a central government. A uniform system of property valuation and assessment was then put in place in the mid-1800s when amendments to the state constitution were enacted.

New Jersey property taxes are a local tax which means that property tax revenues support municipal and county governments as well as local public schools. Property tax revenues do not support state services; however, New Jersey state government does have the power to impose requirements on local governments which are funded through property tax receipts.

To determine property tax rates, local governments and school districts annually adopt budgets and determine the amount of tax revenues needed to fund their operations. The tax rate is then calculated by dividing this amount by the assessed value of all taxable property in a municipality. This rate is then multiplied by the assessed value of a taxpayer’s property to determine property tax liability. The property tax rate is adjusted annually depending on increases/decreases in local budgets, property valuations, and other circumstances which impact a local government’s ability to fund its obligations.

What factors influence high property tax rates?

New Jersey is a great place to live—the state is blessed with the natural beauty of its coastal waters, a highly-educated work force, and well-paying jobs. But the benefits of living in New Jersey also factor into the reasons why residential property in the state is taxed at the highest rate in the nation. Here are a few of the factors:

The state relies almost exclusively on property tax revenues to fund local expenses. New Jersey’s state tax system is structured differently than almost every other state in the country. Most states permit city and county governments to administer local sales and income taxes to fund local services (such as local transportation projects or safety programs administered by a local sheriff’s department). New Jersey strictly limits local taxing authority leaving property tax revenues as the primary revenue source to pay local expenses—including schools and local government services and operations. On average, states in the U.S. derive 33 percent of their revenue base from property taxes; New Jersey depends on property taxes to fund almost 48 percent of its tax base. In adopting this system, the state government believed that shortfalls in annual revenues from local income and sales taxes could result in fiscal stress in municipalities during economic downturns. By adopting a heavy reliance on property taxes, municipalities are able to establish their budgets, calculate the funds they will need for the next fiscal year, and set the residential property tax rate at a level necessary to collect enough tax revenue to pay local government expenses and provide for the needs of municipal residents.

A lot of people live in New Jersey. New Jersey ranks 46th among the 50 states in terms of land size but in terms of population density it ranks 2nd (behind Rhode Island). Urban planners illustrate that the denser the population, the more expensive it is for local governments to provide services— like schools, roads, water systems, etc.—to residents. Infrastructure also tends to age more quickly in areas where it is heavily used and the cost of repairs to infrastructure in densely populated areas is significant often leading to increases in property taxes to finance infrastructure improvements.

New Jersey residents like to have a say in what happens in their local communities. New Jersey has 21 counties, 565 municipalities, and 577 school districts. Each has its own system of governance, employees, and operating costs. Maintaining local government infrastructure is expensive. Savings can be achieved if local governments share the costs of services and assets, and many New Jersey counties and municipalities have taken steps to do this.

New Jersey education costs are some of the highest in the nation—and continue to escalate. Property taxes provide more than 52% of operating revenues for New Jersey primary and secondary schools. The national average of other states is 36%. Like their counterparts across the country, New Jersey public schools incur increases in operating costs that are out-pacing inflation and will likely continue to do so for the foreseeable future. In 2017, per student spending in New Jersey public schools averaged $20,385. (14 of the most expensive school districts in the state have per pupil costs that exceed $30,000/year.)

These are just a few of the considerations taken into account when New Jersey’s state and municipal governments wrestle with how to set residential property tax rates.

Who makes property tax assessments? New Jersey’s 565 municipalities assess the value of residential property within their jurisdiction on an annual basis. Each municipality employs its own assessor whose primary responsibility it is to determine the market value of each property in the taxing district. These valuations are made as of October 1 of the year prior to the current tax year.

How do homeowners know if they are paying their fair share? New Jersey utilizes a system of “equalization” in property tax assessments. “Equalization” ensures that each property carries its fair share of the property tax burden within each taxing district. The process also ensures that all properties in a single jurisdiction are assessed in comparative value to other properties in the same jurisdiction.

Each New Jersey county has its own County Board of Taxation. These Boards were created by the state legislature in 1909 and are responsible for certifying property tax assessments. The Boards also maintain oversight of municipal assessors and the certification of municipal tax rates. Taxpayers who think their property tax assessment is incorrect may appeal it at the County Board of Taxation in the county where the property is located.

Who controls property tax revenues? New Jersey’s state and local tax policy is established by the state legislature with the State collecting most taxes administered in New Jersey. Local governments continue to administer and collect property taxes under the direction of the state legislature and the state Department of Taxation. State government has extended its reach over local taxing authority in the past several decades by abolishing many local taxes or designating them as state taxes. In doing this, the state government pledged to reimburse local governments for the tax revenue they had previously been collecting—but this full reimbursement pledge has not always been honored.

Centralizing control in Trenton for revenue collection creates more pressure and uncertainty for local governments. Municipalities are not only responsible for providing services for their residents—like education, transportation, and public safety—they also assume primary responsibility for paying for them. With state law limits in place on how local governments can raise money, only two primary options—property taxes and user fees—are available to most municipalities to generate revenue.

What do property taxes fund in the state? New Jersey public education is the primary beneficiary of property tax receipts. Approximately one-third of school spending is covered by state funds with the remainder coming from property tax receipts and other locally generated revenues. Property taxes also finance public safety initiatives and health insurance for public employees. While the level of receipts the legislature directs to fund these programs can vary year-to-year, New Jersey pays some of the highest rates when measured against similar programs in other states. New Jersey residents value their safety, and the state pays its public safety officers the second highest salary in the country—topped only by California. (The state also employs over 50 percent more officers per capita than the average state.) Healthcare coverage for New Jersey local government employees is funded by property tax receipts and is often more expensive than healthcare plans provided by private sector companies to their employees. Currently, over 90 percent of New Jersey public employee healthcare costs are funded through property tax receipts.

Is the New Jersey system of property valuation, assessment and taxation similar to what is used by other states? The simple answer is “yes”. There are two principal valuation methods used to determine property taxes: 1) fair market value; or 2) assessed value. All 21 New Jersey counties tax residential property based on its assessed value. Assessments are performed annually with property valuations determined for each parcel as of October 1 of the tax year. Numerous factors are taken into account when valuing property including 1) the state of the local economy; 2) local government expenses; 3) the environment, geography and location of the property; and 4) the physical characteristics of the property. A local appraiser must adhere to state law in determining property value and assessors use one or more of three approaches to make their determination: 1) the Replacement Cost Approach; 2) the Sales Comparison Approach; or 3) the Income Approach. Taxpayers who believe their property assessment was incorrectly calculated have the right to appeal it directly with the county tax board or, if their property is assessed at more than $1,000,000, they may appeal to the State Tax Court.

Are high property tax rates driving people out of New Jersey?There is statistical evidence that indicates New Jersey is, increasingly, becoming unaffordable for working class citizens and millennials. Recent studies show that a worker must make $27.31 per hour to afford a modest two-bedroom apartment in the state. Forty-seven percent of 18-to-34-year-olds in New Jersey still live with their parents and are unable to afford to buy or rent a home of their own. In the past decade, more than 110,000 people in this same age group left New Jersey altogether, with many citing the high cost of living as primary reason for leaving. As residents leave the state, revenues the state and municipalities receive from property, income, and other taxes shrink while expenses relating to providing government services and infrastructure remains constant or increases. To make ends meet, state and local governments often consider tax increases—including property tax increases—as the easiest remedy.

Will the recently-passed federal tax legislation impact New Jersey property owners and property taxes? Congress recently approved significant changes to the federal income tax code. Many provisions in the legislation will significantly impact New Jersey residents, the value of their homes, and, potentially, the amount of property taxes they pay each year.

Personal Income Tax Rates. New Jersey is one of the wealthiest states in the U.S. with 9.1% of New Jersey households having annual incomes over $200,000 and 17.5% with incomes over $100,000. However, 5.3% of households have incomes of less than $10,000 and 24.9% make less than $34,999. The revised federal tax code lowers the income tax rate for nearly every taxpayer resulting in a 10% tax rate for individual taxpayers whose annual income is under $9,525 and a 12% tax rate for individuals with incomes under $38,700. Some upper income individuals will also see a decrease in tax rates with individuals in the highest tax brackets having their tax rates reduced from 39.6% to 37%.

State and local taxes. Taxpayers will now be limited to a maximum deduction of $10,000 for their total property taxes and either income or sales taxes.

Estate Tax. Under the new federal law, the estate tax will only apply to inheritances of at least $22 million for couples. This is almost double the previous threshold.

Standard Deduction. Many individual deductions are eliminated, but the standard deduction has been nearly doubled. The new standard deduction is $12,000 for individuals and $24,000 for couples. However, the personal exemption of $4,050 per person has been eliminated.

Mortgage Interest Deduction. No changes have made to the deductibility of mortgage interest on existing loans. However, new loans will be subject to a cap of $750,000 on mortgage interest that is deductible on a taxpayer’s federal income tax return.

Property Damage. Losses for property damage due to flooding, fire, and storms are no longer deductible unless the property is in an area that is covered by a presidentially declared disaster.

The new $10,000 limit on deducting state and local income and property taxes is expected to have a significant impact on New Jersey homeowners. In 2017, the average New Jersey property tax bill was $8,690 and the median home value was $312,400. Individual state income tax rates in the state range from 1.0% to 8.97% so taxpayers with even modest incomes and homes will quickly reach the statutory limit for taxes they can deduct on their federal tax return. State and local governments in New Jersey and across the nation are already taking a close look at the potential impact of the new tax law to determine ways to relieve the burden on taxpayers. New Jersey legislators are considering several proposals–including treating some property tax payments as charitable contributions to the state and allowing high-income earners who are already subject to the Alternative Minimum Tax to deduct their property taxes (which is currently prohibited).

Summary

Home ownership is the biggest investment for most residents and seeing that investment increase in value makes every homeowner proud. However, often that investment becomes a liability when tax increases tied to a home’s value become an albatross from which the owner can’t escape.

There are options New Jersey’s state and local governments can consider to stabilize property tax bills, but many may require review and reordering of other parts of the state tax code. This effort will also require significant input from taxpayers regarding services funded by property tax receipts that are most important to them. This is a job not easily accomplished and will take as much technical expertise as it will political willpower by citizens and legislators to achieve positive results for New Jersey citizens.